In the context of game theory and oligopoly profit, what is the only stable outcome in a payoff matrix?

• A. Nash equilibrium
• B. Pareto optimal outcome
• C. Dominant strategy equilibrium
• D. Collusive agreement

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of a payoff matrix in game theory, which represents the payoffs for each player depending on the strategies chosen by all players.
2. Step 2: Recognize that a Nash equilibrium is a set of strategies where no player can improve their payoff by unilaterally changing their own strategy, given the other players' strategies.
3. Step 3: Compare the Nash equilibrium to other concepts: a Pareto optimal outcome maximizes joint payoffs but may not be stable; a dominant strategy equilibrium requires a strategy that is best regardless of others' actions; a collusive agreement involves cooperation but may not be stable due to incentives to deviate.
4. Step 4: Identify that the only stable outcome in a payoff matrix is the Nash equilibrium because it reflects mutual best responses where no player has an incentive to deviate.
5. Step 5: Conclude that in oligopoly profit contexts, the Nash equilibrium predicts the stable strategic outcome among competing firms.